NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers

Absolute Return, CAGR, XIRR and TWRR Explained

Updated 11 October 2026 · Fact-checked

Absolute return is the simple percentage gain over the whole period. CAGR annualises that gain when there are no cash flows. XIRR is the money-weighted annual return that reflects the timing and size of your cash flows. TWRR links sub-period returns to remove cash flow effects and judges the manager.

Understand Return Measures: Absolute, CAGR, XIRR and TWRR

Every return measure answers the same question: how much did the money grow? The difference lies in how each measure treats time and cash flows.

Absolute return is the total gain as a percentage of the starting value. It ignores how long the money was invested. A 40% gain in 2 years and a 40% gain in 10 years look identical, so it is only useful for comparing periods of the same length.

CAGR (Compound Annual Growth Rate) converts the total growth into a steady yearly rate. It assumes one investment at the start and one value at the end, with no additions or withdrawals in between. Use it for periods longer than one year. For one year or less, returns are normally not annualised in this way.

When a client adds or withdraws money during the period, CAGR no longer works. Two measures handle this. XIRR is a money-weighted return. It finds the single annual rate that makes the present value of all dated cash flows equal to zero. It is affected by when the client put in or took out money, which the manager does not control. So XIRR shows the client's own experience.

TWRR (Time-Weighted Rate of Return) breaks the period into sub-periods at each cash flow, calculates the return of each, and multiplies them together. Because each sub-period return is independent of the amount invested, TWRR removes the effect of client cash flows. It is the standard way to judge the skill of a portfolio manager and to compare managers.

Key formulas to remember

Absolute return: Absolute return (%) = (Ending value − Beginning value) ÷ Beginning value × 100; No time adjustment. Add income received if it is not already in the ending value.
CAGR: CAGR = (Ending value ÷ Beginning value)^(1/n) − 1; n is the number of years. Valid only when there are no interim cash flows.
Sub-period return: R = (Ending value of the sub-period before any flow − Beginning value of the sub-period) ÷ Beginning value of the sub-period, or R = Ending value before any flow ÷ Beginning value − 1; A sub-period ends at a cash flow or at the period end. Value the portfolio just before each cash flow, or at the period end for the last sub-period. Beginning value of the next sub-period includes the flow.
TWRR (linked return): TWRR = [(1 + R1) × (1 + R2) × ... × (1 + Rn)] − 1; Annualise only if the total period is more than one year, using the CAGR step on the linked result.
XIRR: Σ [Cash flow(i) ÷ (1 + XIRR)^((date(i) − date(0)) ÷ 365)] = 0; Investments are negative, withdrawals and the final value are positive. Solved by spreadsheet or calculator, not by hand.

How to solve Return Measures: Absolute, CAGR, XIRR and TWRR questions

Pick the measure from the wording of the question, then apply it carefully.

1Read the question for cash flows. Are there additions or withdrawals between the start and the end?
2If there are none and the period is over one year, use CAGR. If you only need the total gain, use absolute return.
3If the question asks to judge the manager or remove the effect of client flows, use TWRR.
4If the question asks for the client's actual annualised return with dated flows, use XIRR.
5For TWRR, split the period at every cash flow. Use the portfolio value just before each flow to get that sub-period's return.
6Convert each sub-period return to 1 + R, multiply them all, then subtract 1.
7Annualise only if the total period exceeds one year. Check that your answer is in percentage form and matches an option.

Quickest way: Spot the measure, then multiply growth factors

When to use it: Use in the exam when the question gives values before and after each cash flow and asks for TWRR or CAGR.

Write each sub-period as a growth factor: end value ÷ start value.
Multiply the factors. Subtract 1 for the total return.
For CAGR, take the nth root of the growth factor, or test the options by compounding them.
Eliminate options using direction logic for net additions: if the client added more money before a period of strong returns, XIRR tends to be higher than TWRR. If more was added before a weak period, XIRR tends to be lower. For withdrawals the effect reverses.
If there are no cash flows, TWRR equals the plain total return.

Common mistakes in Return Measures: Absolute, CAGR, XIRR and TWRR

Using CAGR for a portfolio with additions or withdrawals
CAGR looks simple and is the most familiar annual measure.
Fix: Check for interim flows first. If they exist, use XIRR for the client's return and TWRR for the manager.
Including the cash flow in the sub-period gain
Students compare the value after a deposit with the value before it.
Fix: Take the value just before the flow as the end of that sub-period. The deposit starts the next one.
Adding sub-period returns instead of multiplying
Absolute returns are added in everyday thinking.
Fix: Always link as (1 + R1) × (1 + R2) − 1. Returns compound.
Saying TWRR is affected by the timing of client flows
Confusing TWRR with the money-weighted return.
Fix: Remember: time-weighted ignores flow size and timing. Money-weighted (XIRR) depends on them.
Annualising a return for a period shorter than a year
Applying the CAGR formula by habit.
Fix: Report returns for periods up to one year as they are. Annualise only beyond one year.
Using the wrong n in CAGR
Mixing months and years.
Fix: Convert to years first. 30 months is 2.5 years.

Worked examples

Example 1

A PMS client invested ₹10,00,000 and after 3 years the portfolio is worth ₹13,31,000 with no interim cash flows. Find the absolute return and the CAGR.

Show the solution

Absolute return = (13,31,000 − 10,00,000) ÷ 10,00,000 = 0.331, or 33.1%.
Growth factor = 13,31,000 ÷ 10,00,000 = 1.331.
1.331 is 1.1 × 1.1 × 1.1, so the cube root is 1.1.
CAGR = 1.1 − 1 = 0.10, or 10%.

Answer: Absolute return 33.1%; CAGR 10% per year.

Example 2

A portfolio starts at ₹10,00,000. After 6 months it is worth ₹11,00,000 and the client adds ₹1,00,000, making ₹12,00,000. At the end of the year the portfolio is worth ₹12,60,000. Find the TWRR for the year and the absolute gain in rupees.

Show the solution

Sub-period 1: 11,00,000 ÷ 10,00,000 = 1.10, so R1 = 10%.
Sub-period 2 starts at ₹12,00,000 and ends at ₹12,60,000: 12,60,000 ÷ 12,00,000 = 1.05, so R2 = 5%.
TWRR = 1.10 × 1.05 − 1 = 1.155 − 1 = 0.155, or 15.5%.
The period is one year, so no annualising is needed.
Rupee gain = 12,60,000 − 10,00,000 − 1,00,000 = ₹1,60,000, since the added ₹1,00,000 is not a gain.

Answer: TWRR is 15.5%; the rupee gain is ₹1,60,000.

Exam tips

Look for the keywords: 'manager skill' or 'remove effect of cash flows' points to TWRR; 'client's experience' or 'dated cash flows' points to XIRR.
Do not annualise returns for periods of one year or less unless the question says so.
Expect conceptual MCQs: which measure is affected by cash flow timing, and which is preferred to compare managers.
NISM-Series-XXI-A has negative marking of 10% of the marks for each question, so avoid blind guesses.
Compute the growth factors first. Many options differ only by adding rather than compounding returns.

Practice questions from Performance Measurement and Evaluation of Portfolio Managers

Return Measures: Absolute, CAGR, XIRR and TWRR: frequently asked questions

What is the difference between CAGR and XIRR?

CAGR assumes one investment at the start and one value at the end. XIRR handles several dated inflows and outflows and gives the annual rate that matches them all. Use XIRR when the client adds or withdraws money during the period.

Why is TWRR used to evaluate PMS managers?

The manager does not control when clients add or withdraw money. TWRR removes the effect of those flows, so it reflects only the investment decisions. This makes managers comparable.

Can XIRR be higher than TWRR?

Yes, it can be higher or lower, depending on the size and timing of the flows against the returns. If the client made net additions before a strong period, XIRR tends to be higher than TWRR. If more was added before a weak period, XIRR tends to be lower. For withdrawals the effect reverses.

Do I need to calculate XIRR by hand in the exam?

Not usually, because XIRR needs a trial-and-error solution. Expect to understand what it measures and how it differs from TWRR, and to calculate simpler measures such as absolute return, CAGR and linked returns.